Employment in the long run?

Question

How does raising the price of capital have a negative impact on employment in the long run?

Answer 1

A more sophisticated answer: at the firm level, it depends on how easily labor can be substituted for capital (the substitution effect), and how much optimal output will be reduced because an input has increased in price (an "income" effect). This is fairly easy to see  with isoquants, which are usually in an appendix to one of the production  chapters of an intro micro text. With output fixed, more labor will be used relative to capital if there is any substitutability in inputs (curved isoquants), but since output will probably be lower, labor input could fall.

In a long-run macro setting, investment in new capital will be slowed by an increase in cost of capital, which will slow growth of potential GDP, and thus slow growth of labor needed to produce that output. But this gets very tricky depending on how the labor market functions.

Answer 2

Is this for a homework? Who is your teacher, captain obvious?

How hard is it to understand that expensive capital goods make it more difficult to establish industries and associated jobs?

Answer 3

The price of capital is the interest rate people have to pay on the loans they get.

If the interest rate is high.  Then the monthly payments for the loan are also high.  And this reduces the profits people can make from their business.

In marginal businesses, where profit margins are low.  High interest rate can make the business unprofitable.  And this usually results in laying off of workers and closure of the business.